What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-16 · 125 added, 100 removed, 217 unchanged (51% of the section changed)

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We also believe developers will prefer to borrow from us rather than other lending sources because of our flexibility in structuring loans to suit their needs, our lending criteria, which places greater emphasis on the value of the collateral rather than the property cash flow or credit of the borrower, and our ability to close quickly.

Review of First Half of 2021 and Outlook for Balance of Year

Compared to the first half of 2020, revenue increased 44.2%, net income increased 4.6%, and earnings per share was unchanged at $0.10 per share.

The revenue increase was directly related to an increase in interest income of 49.4%, which reflects the growth in our lending activities.

Review of the first Nine Months of 2021 and Outlook for Balance of Year

Compared to the first nine months of 2020, revenue increased 62.5%, net income to common shareholders increased 21.9%, and earnings per share increased $0.02 per share.

The revenue increase was directly related to an increase in interest income of 58.8%, which reflects growth in our lending activities.

The increase in revenue was offset by an 90.6% increase in total operating costs and expenses.

The increase in operating expenses is mainly attributable to a 116.1% increase in interest and amortization of deferred financing costs related to the increase in notes payable used to finance working capital ($110.1 million at June 30, 2021 compared $55.7 million at June 30, 2020).

In addition, the increase in compensation, fees and taxes represented 18.7% of the total increase in operating costs, reflecting the addition of a Chief Operating Officer in July, 2020 and a Chief Investment Officer in April, 2021, both of whom are part of our long-term growth strategy.

The increase in net income was generally related to the growth in our loan portfolio and significant origination fee income.

Mortgages receivable increased by 55.1% or $61.4 million compared to June 30,2020, while cash and cash equivalents and investment securities increased 417.9% or $86.1 million.

The increase in cash and cash equivalents and investment securities was due primarily to $22.9 million of net proceeds from the sale of common shares, and $40.6 million of net proceeds from the sale of our Series A Preferred Stock.

The increase in operating expenses is mainly attributable to a 111.6% increase in interest expense and amortization of deferred financing costs and a 76.5% increase in compensation and related expenses.

The increase in compensation expense is mainly attributable to the addition of a Chief Operating Officer in July 2020 and a Chief Investment Officer in April 2021, positions that are part of our long-term growth strategy.

In addition, we added support staff in our operations and finance teams to assist in the servicing of our loan portfolio.

The increase in net income to common shareholders was generally related to the growth in our loan portfolio and significant origination fee income.

Mortgages receivable increased by 77.2% or $95.8 million compared to September 30, 2020, while cash and cash equivalents and investment securities increased 127.7% or $42.3 million.

The increase in cash and cash equivalents and investment securities was due primarily to $30.9 million of net proceeds from the sale of common shares, and $45.5 million of net proceeds from the sale of our 7.75% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”).

Our primary business objective remains to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term principally through dividends.

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To drive operational excellence, we have embarked on a broad change management initiative to review, assess, and upgrade – or transform if necessary – our existing operational processes, from workflows and employee roles/responsibilities to decision trees and data collection forms.

To that end, in the third quarter of 2021 we rolled out a new underwriting model that autmotated the production of our loan documentation – term sheets, proof of funds, etc.

The automation allows for more accurate and timely processing of loans, thus increasing loan production while keeping our employee headcount down.

In addition, we have focused on developing relationships with larger scale wholesale brokers, furthering our efforts to attract larger borrowers with better credit quality.

We believe that our ability to react quickly to the needs of borrowers, our flexibility in terms of structuring loans to meet the needs of borrowers, our knowledge of the primary real estate markets we lend in, our expertise in “hard money” lending and our focus on newly originated first mortgage loans, should enable us to achieve our primary objective.

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● operate to qualify as a REIT and for an exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act.

In terms of our outlook for 2021, the biggest challenge remains the unknown impact of COVID-19 and future actions that may be taken to contain the spread of COVID-19.

In terms of our outlook for the remainder of 2021, the biggest challenge remains the unknown impact of COVID-19 and future actions that may be taken to contain the spread of COVID-19.

Keeping our workforce healthy and safe is our number one priority and we are following the updated guidelines and recommendations issued by the State of Connecticut and Centers for Disease Control.

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● delay foreclosure or other judicial proceedings necessary to enforce our rights.

Other factors that we believe will impact our business in 2021 include the following:

Other factors that we believe will impact our business for the remainder of 2021 include the following:

Increased competition.

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The new competitive landscape is shifting the negotiating leverage in favor of borrowers.As borrowers have more choices, they are demanding better terms.

As of June 30, 2021, the yield on our portfolio was 11.72% compared to 12.38% for the same period in 2020.

We expect further rate compression in 2021.

As of September 30, 2021, the yield on our portfolio was 11.92% compared to 12.28% for the same period in 2020.

We expect rate compression will continue for the balance of 2021.

Property value fluctuations.

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However, where all or a portion of the loan proceeds are to be used to fund the costs of renovating or constructing improvements on the property, only a portion of the loan may be funded at closing.

At June 30, 2021, our mortgage loan portfolio included 130 loans with future funding obligations, in the aggregate principal amount of $31,845,533.

At September 30, 2021, our mortgage loan portfolio included 157 loans with future funding obligations, in the aggregate principal amount of $61,707,185, compared to 105 loans in the aggregate principal amount of $13,342,248 at September 30, 2020.

The increase is due to an increase in construction loan originations, a large portion of which is in the Florida market.

Advances under these loans are funded against requests supported by all required documentation (including lien waivers) as and when needed to pay contractors and other costs of construction.

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Our goal is, and has always been, to continue to grow our mortgage loan portfolio and increase our loan profitability, while at the same time maintain or improve on our existing underwriting and loan criteria.

Specifically, we believe that the following factors will, in fact, help us deal with the uncertainties expected in 2021:

● As of June 30, 2021, we had cash and cash equivalents and investment securities of approximately $106.7 million, which we plan to use in the second half of 2021 to increase our mortgage loan portfolio.

From January through June 30, 2021, we funded $75.2 million of mortgage loans including loan modifications and construction draws.

● During the second quarter of 2021, we significantly reduced our leverage, thereby mitigating the risks should economic conditions deteriorate.

At June 30, 2021, our capital structure was 50.6% debt and 49.4% equity compared to 63% debt and 37% equity at March 31, 2021.

Specifically, we believe that the following factors will, in fact, help us deal with the uncertainties expected in the remainder of 2021:

● From January through September 30, 2021, we funded approximately $154.8 million of mortgage loans including loan modifications and construction draws.

The sources for these loans and draws included cash and cash equivalents at December 31, 2020 (approximately $19.4 million), short term marketable securities at December 31, 2020 (approximately $37.3 million), net proceeds from the sale of our Series A Preferred stock (approximately $45.5 million), net proceeds from the sale of common shares (approximately $30.9 million) and loan repayments (approximately $90.5 million).

As of September 30, 2021, we had cash and cash equivalents and investment securities of approximately $75.3 million.

We plan to use these funds during the remainder of 2021 to increase our mortgage loan portfolio.

As of October 22, 2021 we had issued term sheets for new loans in the aggregate principal amount of approximately $75.6 million.

Some of these loans may never get funded for a variety of reasons.

In addition, as of October 22, 2021, we had applications in-house for loans totaling approximately $123.0 million.

None of these loans have been approved and none may ever be approved.

● Beginning in the second quarter of 2021, we significantly reduced our leverage, thereby mitigating the risks should economic conditions deteriorate.

At September 30, 2021, our capital structure was 49.3% debt and 50.7% equity compared to 63% debt and 37% equity at March 31, 2021.

The change was accomplished by selling equity – common shares and preferred shares – rather than by reducing our indebtedness.

Our total indebtedness at June 30, 2021 was approximately $148.8 million, including deferred financing costs.

Our total indebtedness at September 30, 2021 was approximately $144.6 million, including deferred financing costs.

Of this amount, approximately $30.1 million is the outstanding balance on our credit facility with Wells Fargo, which is currently accruing interest at the relatively modest rate of 1.5%.

remaining indebtedness, approximately $114.5 million, is the aggregate outstanding principal balance on our unsubordinated unsecured notes, which have a weighted average interest rate of 7.36% per annum.

The remaining indebtedness, approximately $114.5 million, is the aggregate outstanding principal balance on our unsubordinated unsecured notes, which have a weighted average interest rate of 7.36% per annum.

On the other hand, the notes provide us with operational flexibility.

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● On July 21, 2021, we consummated a $200 million master repurchase financing facility (“Facility”) with Churchill MRA Funding I LLC (“Churchill”), a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New York, New York.

Under the terms of the Facility, we have the right, but not the obligation, to sell mortgage loans to Churchill and Churchill has the right, but not the obligation, to purchase those loans.

The cost of capital under the facility is equal to the sum of (a) the greater of (i) 0.25% and (ii) the 30-dayLIBOR plus (b) 3%-4%, depending on the aggregate principal amount of the mortgage loans held by Churchill at that time.

The Facility matches the term of our loans and gives us the ability to raise capital as needed at a relatively low rate without securitizing our entire loan portfolio.

Under the terms of the Master Repurchase Agreement entered into in connection with the Facility (the “MRA”), we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans.

In addition, we have the right and, in some instances the obligation, to repurchase those loans from Churchill.

The amount that Churchill will pay for each mortgage loan it purchases will vary based on the attributes of the loan and various other circumstances.

The repurchase price is calculated by applying an interest factor to the purchase price of the mortgage loan.

We have also granted Churchill a first priority security interest on the mortgage loans sold to Churchill to secure its repurchase obligation.

The cost of capital under the Facility is equal to the sum of (a) the greater of (i) 0.25% and (ii) the 30-day LIBOR plus (b) 3%-4%, depending on the aggregate principal amount of the mortgage loans held by Churchill at that time.

The MRA contains other terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements.

In addition, the Company has agreed that it will not (A) (i) pay any dividends or make distributions in excess of 90% of its taxable income, (ii) incur any indebtedness or (iii) purchase any of its capital stock, unless, in any case, it has an asset coverage ratio of at least 150%;

and (B) has unencumbered cash and cash equivalents in an amount equal to or greater than 2.50% of the amount of its repurchase obligations.

Churchill has the right to terminate the Facility at any time upon 180 days prior notice to the Company.

The Company then has an additional 180 days after termination to repurchase all the mortgage loans held by Churchill.

(See Note 6 to the attached financial statements.)

● We have made the necessary adjustments to our operations to replace our former co-chief executive officer by hiring new employees and re-assigning existing employees to new tasks.

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Under these arrangements, we would provide loan funding capital as well as our underwriting and servicing expertise and our local partners would provide us with “boots on the ground” lending opportunities.

We have had preliminary discussion with various local lenders in Austin, Texas, Orlando, Florida and Greenwich, Connecticut all of whom seem to be receptive to the notion.

We recently leased office space in Austin, Texas, which is manned by one of our shareholders who lives in the area as well as a sales and marketing campaign, primarily via Google advertising, in the hopes of building a robust pipeline to supplement our operator and to develop the Sachem brand in Texas.

We also have had preliminary discussion with local lenders in other markets, including Orlando, Florida, Greenwich, Connecticut, Charlotte, North Carolina and Atlanta, Georgia.

We plan to continue these discussions and scout other locations as well.

However, we have not yet entered into any definitive agreements and we cannot assure you that we will be able to consummate any such partnerships or joint ventures on terms that will be acceptable to all parties.

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We usually receive origination fees, or “points,” ranging from 2% to 5% of the original principal amount of the loan as well as other fees relating to underwriting, funding and managing the loan, such as inspection fees.

treat an extension or renewal of an existing loan as a new loan, we also receive additional “points” and other loan-related fees in connection with those transactions.

Since we treat an extension or renewal of an existing loan as a new loan, we also receive additional “points” and other loan-related fees in connection with those transactions.

Interest is always payable monthly in arrears.

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We rely on readily available market data, including appraisals when available or timely, tax assessment rolls, recent sales transactions and brokers to evaluate the value of the collateral.

Finally, we have adopted a policy that limits the maximum amount of any loan we fund to a single borrower or a group of affiliated borrowers to 10% of the aggregate amount of our loan portfolio, taking into consideration the loan under consideration.

At September 30, 2021, we had one borrower whose outstanding loans, in the aggregate principal amount of $22.3 million, represented 10.2% of our mortgage loan portfolio.

In addition, we had a second borrower with loans having an aggregate outstanding principal amount of $10.0 million, which represented approximately 4.6% of our mortgage loan portfolio.

However, our total funding obligations to this borrower are approximately $23.4 million.

On a fully funded basis, the total amount outstanding to this borrower would have represented approximately 10.0% of our mortgage loan portfolio as of September 30, 2021.

Our revenue consists primarily of interest earned on our loan portfolio.

As of March 31, 2021, our capital structure was weighted towards more debt versus equity and debt service has become a significant factor in determining our net income.

As of June 30, 2021 our capital structure shifted and is more balanced -- approximately 50.6% debt and 49.4% equity.

As of September 30, 2021 our capital structure shifted and is more balanced -- approximately 49.3% debt and 50.7% equity.

Most of our debt, approximately $114.5 million, is unsecured unsubordinated 5-year notes.

The weighted average interest rate on these notes is 7.36%.

In addition, we had a balance of approximately $34.3 million at June 30, 2021 under our margin loan account with Wells Fargo.

In addition, we had a balance of approximately $30.1 million at September 30, 2021 under our margin loan account with Wells Fargo.

The outstanding balance on this loan bears interest at a rate equal to 1.75% below the prime rate.

The interest rate on this loan as of June 30, 2021 was 1.5%.

In addition, our net income for the three and six months ended June 30, 2021 has been adversely impacted by a reduction in the yield on our mortgage loan portfolio as well as $58.0 million of loan payoffs during the six month period compared to $55 million for all of 2020.

In the first half of 2021, we realized faster payoff of investment “fix and flip” loans with these projects coming to fruition quicker due to a stronger real estate market and, we believe, our sound underwriting and analysis of each project.

The interest rate on this loan as of September 30, 2021 was 1.5%.

In addition, our net income for the three and nine months ended September 30, 2021 has been adversely impacted by a reduction in the yield on our mortgage loan portfolio as well as $90.4 million of loan payoffs during the nine month period compared to $55 million for all of 2020.

In the first nine months of 2021, we realized faster payoff of investment “fix and flip” loans with these projects coming to fruition quicker due to a stronger real estate market and, we believe, our sound underwriting and analysis of each project.

The velocity with which our loans are paid off reflects the health of our portfolio.

Despite these payoffs, we were able to redeploy the capital into new loans, boosting the yield to our shareholders by recognizing origination fees over shorter durations than originally underwritten.

Our strategy continues to be to adhere to our current underwriting guidelines, which we believe will allow us to continue to grow our loan portfolio while protecting and preserving capital in a manner that provides attracted risk-adjusted returns to our shareholders.

For the six months ended June 30, 2021 and 2020, the yield on our mortgage loan portfolio was 11.72% and 12.38%, respectively.

For the nine months ended September 30, 2021 and 2020, the yield on our mortgage loan portfolio was 11.92% and 12.28%, respectively.

For this purpose, yield only takes into account the stated interest rate on the mortgage note adjusted to the default rate, if applicable.

We believe the interest rate compression will continue to be a factor in 2021 as we implement our new strategy focusing on larger loans, secured by higher quality properties being developed by more seasoned developers with a history of successful development projects.

We believe the interest rate compression will continue to be a factor for the remainder of 2021 as we implement our new strategy focusing on larger loans, secured by higher quality properties being developed by more seasoned developers with a history of successful development projects.

On the other hand, since the interest rate on our outstanding indebtedness is fixed, we have reduced the risk on interest rate compression if and when interest rates begin to increase.

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We seek to mitigate some of the risk associated with rising rates by limiting the term of new loans to one year.

At June 30, 2021, approximately 88.5% of the mortgage loans in our portfolio had a term of one year or less.

At September 30, 2021, approximately 87.6% of the mortgage loans in our portfolio had a term of one year or less.

If, at the end of the term, the loan is not in default and meets our other underwriting criteria, we will consider an extension or renewal of the loan at our then prevailing interest rate.

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As such, we may not be aware that a default occurred.

At June 30, 2021, seven of our mortgage loans were the subject of enforcement or collection proceedings.

At September 30, 2021, eight of our mortgage loans were the subject of enforcement or collection proceedings.

The aggregate amount due on these loans, including principal, unpaid accrued interest and borrower charges, was approximately $892,000, representing approximately 0.4% of our aggregate mortgage loan portfolio.

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In addition, rapidly rising interest rates could have an unsettling effect on real estate values, which could compromise some of our collateral.

In June 2021 and July 2021, we raised aggregate net proceeds of approximately $45.4 million (after deducting underwriting discounts and commissions and offering expenses) from the sale of 1,903,000 shares of our Series A Preferred Stock (defined below) in the Series A Offering (defined below) as described in Liquidity and Capital Resources below and Notes 11 and 15 to the accompanying financial statements.

In June 2021 and July 2021, we raised aggregate net proceeds of approximately $45.5 million (after deducting underwriting discounts and commissions and offering expenses) from the sale of 1,903,000 shares of our Series A Preferred Stock in the Series A Offering (defined below) as described in Liquidity and Capital Resources below and Notes 11 and 14 to the accompanying financial statements.

The Series A Preferred Stock is listed on the NYSE American and began trading under the symbol “SACHPRA” on July 6, 2021.

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Although we have no pre-set guidelines in terms of leverage ratio, the amount of leverage we will deploy will depend on our assessment of a variety of factors, which may include the liquidity of the real estate market in which most of our collateral is located, employment rates, general economic conditions, the cost of funds relative to the yield curve, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, our opinion regarding the creditworthiness of our borrowers, the value of the collateral underlying our portfolio, and our outlook for interest rates and property values.

At June 30, 2021, debt represented approximately 50.6% of our total capital.

To grow the business and satisfy the requirement to pay out 90% of net profits, during the last two years we increased our level of debt from 41.7% to 63.0% of our total capital before reducing our debt level to 50.6% this quarter.

At September 30, 2021, debt represented approximately 49.3% of our total capital.

To grow the business and satisfy the requirement to pay out 90% of net profits, starting in June 2019 we gradually raised our debt level from 41.7% to as much as 63.0% of our total capital in the second quarter of 2021.

We intend to maintain a modest amount of leverage for the sole purpose of financing our portfolio and not for speculating on changes in interest rates.

Our total outstanding indebtedness at June 30, 2021 was approximately $148.8 million, which included a credit line loan of approximately $34.3 million and three series of unsecured, unsubordinated five-year notes having an aggregate original principal amount of approximately $114.5 million (collectively, the “Notes”), including deferred financing costs.

Our total outstanding indebtedness at September 30, 2021 was approximately $144.6 million, which included a credit line loan of approximately $30.1 million and three series of unsecured, unsubordinated five-year notes having an aggregate original principal amount of approximately $114.5 million (collectively, the “Notes”), including deferred financing costs.

The Notes include notes having an aggregate principal amount of approximately $23.7 million bearing interest at the rate of 7.125% per annum and have a maturity date of June 30, 2024 (the “June 2024 Notes”);

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The June 2024 Notes trade under the symbol “SCCB”, the December 2024 Notes trade under the symbol “SACC” and the 2025 Notes trade under the symbol “SCCC”.

We have a margin loan account with Wells Fargo, which is secured by our portfolio of short-term securities and has a balance of approximately $34.3 million at June 30, 2021.

We have a margin loan account with Wells Fargo, which is secured by our portfolio of short-term securities and has a balance of approximately $30.1 million at September 30, 2021.

The outstanding balance on this loan bears interest at a rate equal to 1.75% below the prime rate.

The interest rate at June 30, 2021 is 1.5%.

On July 21, 2021, we consummated a $200 million master repurchase financing facility (“Facility”) with Churchill MRA Funding I LLC (“Churchill”), a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New

York, New York.

The interest rate at September 30, 2021 is 1.5%.

On July 21, 2021, we consummated a $200 million Facility with Churchill, a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New York, New York.

Under the terms of the Facility, we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans.

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It also gives us the flexibility to seek other sources of funding.

(See above and Note 6 to the attached financial statements.)

REIT Qualification

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Results of Operations

Three months ended June 30, 2021 compared to three months ended June 30, 2020

Three months ended September 30, 2021 compared to three months ended September 30, 2020

Total revenue

Total revenue for the three months ended June 30, 2021 was approximately $6.7 million compared to approximately $4.3 million for the three months ended June 30, 2020, an increase of approximately $2.4 million, or 56.0%.

The increase in revenue is primarily attributable to the growth in our lending operations.

Total revenue for the three months ended September 30, 2021 was approximately $8.5 million compared to approximately $4.3 million for the three months ended September 30, 2020, an increase of approximately $4.3 million, or 99.5%.

The increase in revenue is primarily attributable to the growth in our lending operations as a direct result of our receipt of approximately $45.5 million from the sale of the the Series A Preferred Stock as well as the velocity at which existing loans are repaid and our ability to quickly recycle those proceeds into new loans and generate new origination fees.

For the 2021 period, interest income was approximately $6.1 million compared to approximately $3.5 million for the 2020 period, representing an increase of approximately $2.6 million or 75.5%.

Origination fees increased to approximately $999,300 for the 2021 period compared to approximately $393,100 for the 2020 period.

Investment income for the 2021 period was $180,000 compared to approximately $33,000 for the 2020 period.

Investment income for the 2021 period was approximately $275,700 compared to approximately $32,500 for the 2020 period.

This increase reflects reflects both a larger investment portfolio and more favorable market conditions during 2021.

In the 2021 period we had $85,000 of gains from the sale of investment securities compared to a loss of approximately $8,900 for the 2020 period.

In the 2021 period we had approximately $256,400 of gains from the sale of investment securities compared to a loss of approximately $22,000 for the 2020 period.

Other income was approximately $579,700 for the 2021 period compared to approximately $337,000 for the 2020 period, an increase of approximately $242,900, or 72.1%.

Finally, in the 2021 period we recognized gain on the extinguishment of debt of $257,845.

Operating costs and expenses

Total operating costs and expenses for three months ended June 30, 2021 were approximately $4.2 million compared to approximately $2.0 million for the three months ended June 30, 2020, an increase of approximately $2.2 million or 105.1%.

Total operating costs and expenses for three months ended September 30, 2021 were approximately $4.2 million compared to approximately $2.1 million for the three months ended September 30, 2020, an increase of approximately $2.1 million or 97.9%.

The increase in operating costs and expenses is primarily attributable to the increase in interest expense and amortization of deferred financing costs, which, in turn, is a direct result of an increase in our overall indebtedness, particularly our unsubordinated unsecured notes.

At June 30, 2021, total indebtedness was $148.8 million and the aggregate outstanding principal amount of our notes was $114.5 million (including deferred financing costs).

In comparison, at June 30, 2020, the corresponding amounts were $59.0 million and $58.2 million, respectively.

In the 2021 period, interest and amortization of deferred financing costs was approximately $2.5 million compared to approximately $1.2 million in the same 2020 period, an increase of $1.3 million, or 118.2%.

The balance of the increase in operating expenses was attributable to (i) professional fees, which increased approximately $141,000.

or 128.1%, (ii) compensation, fees and taxes which increased approximately $424,000, or 109.3%, (iii) general and administrative expenses which increased approximately $121,000, or 94.8%, and an increase in impairment loss of $49,000, or 20%.

In November 2019 one of our co-chief executive officers and our director of marketing resigned, which reduced our compensation expense in the three months ended June 30, 2020.

Since July of 2020, we hired a chief operating officer, chief investment officer, and junior executives in accounting and administration, which resulted in increased compensation for the three and six month periods ended June 30, 2021.

At September 30, 2021, total indebtedness was approximately $144.6 million and the aggregate outstanding principal amount of our notes was approximately $114.5 million (including deferred financing costs).

In comparison, at September 30, 2020, the corresponding amounts were approximately $84.6 million and $72.5 million, respectively.

In the 2021 period, interest and amortization of deferred financing costs was approximately $2.6 million compared to approximately $1.3 million in the same 2020 period, an increase of approximately $1.3 million, or 105.2%.

The balance of the increase in operating expenses was attributable to (i) professional fees, which increased approximately $25,300, or 16.0%, (ii) compensation, fees and taxes which increased approximately $271,200, or 54.2%, (iii) general and administrative expenses which increased approximately $149,700, or 103.1%, an impairment loss of approximately $150,000 and an increase in the loss on sale of real estate of approximately $91,600.

In November 2019 one of our co-chief executive officers and our director of marketing resigned, which reduced our compensation expense in the three months ended September 30, 2020.

Since July 2020, we hired a chief operating officer, chief investment officer and junior executives in accounting and administration, which resulted in increased compensation for the three and nine month periods ended September 30, 2021.

Comprehensive income

For the quarter ended June 30, 2021, we reported an unrealized loss on investment securities of approximately $104,000 reflecting the decrease in the market value of such securities since March 31, 2021.

For the quarter ended June 30, 2020, we reported an unrealized gain on investment securities of approximately $221,000 reflecting the increase in the market value of such securities since March 31, 2020.

Net income for the three months ended June 30, 2021 was approximately $2.5 million, or $0.10 per share, compared to $2.3 million, or $0.10 per share for the three months ended June 30, 2020.

Six months ended June 30, 2021 compared to six months ended June 30, 2020

For the quarter ended September 30, 2021, we reported an unrealized loss on investment securities of approximately $500,000 reflecting the decrease in the market value of such securities since June 30, 2021.

For the quarter ended September 30, 2020, we reported an unrealized loss on investment securities of approximately $73,000 reflecting the decrease in the market value of such securities since June 30, 2020.

Net income attributable to common shareholders for the three months ended September 30, 2021 was approximately $3.4 million, or $0.12 per share, compared to approximately $2.1 million, or $0.10 per share for the three months ended September 30, 2020.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

Total revenue

Total revenue for the six months ended June 30, 2021 was approximately $12.4 million compared to approximately $8.6 million for the six months ended June 30, 2020, an increase of approximately $3.8 million, or 44.2%.

Total revenue for the nine months ended September 30, 2021 was approximately $20.9 million compared to approximately $12.9 million for the nine months ended September 30, 2020, an increase of approximately $8.1 million, or 62.5%.

The increase in revenue is primarily attributable to the growth in our lending operations.

For the 2021 period, interest income was approximately $15.3 million compared to approximately $9.6 million for the 2020 period, representing an increase of approximately $5.7 million or 58.8%.

Origination fees increased to approximately $1.35 million for the 2021 period compared to approximately $1.2 million for the 2020

Origination fees increased to approximately $2.3 million for the 2021 period compared to approximately $1.6 million for the 2020 period.

Investment income increased to approximately $699,000 for the 2021 period compared to approximately $163,000 for the 2020 period due to our larger investment portfolio and more favorable market conditions during 2021.

Net losses on the sale of investment securities was approximately $44,000 for the 2021 period compared to net gains of approximately $437,000 for the 2020 period.

Net gain on the sale of investment securities was approximately $212,000 for the 2021 period compared to net gains of approximately $415,000 for the 2020 period.

Other income was approximately $1.6 million for the 2021 period compared to approximately $904,000 for the 2020 period, an increase of approximately $676,000, or 74.8%.

Finally, in the 2021 period we recognized gain on the forgiveness of debt of approximately $257,800.

Operating costs and expenses

Total operating costs and expenses for six months ended June 30, 2021 were approximately $7.7 million compared to approximately $4.1 million for the six months ended June 30, 2020, an increase of approximately 87.4%.

Total operating costs and expenses for the nine months ended September 30, 2021 were approximately $11.9 million compared to approximately $6.3 million for the nine months ended September 30, 2020, an increase of approximately 90.6%.

The increase in operating costs and expenses is primarily attributable to the increase in our unsecured bond debt while growing our lending operations and for the reasons discussed herein.

In the 2021 period, interest and amortization of deferred financing costs was approximately $5.0 million compared to approximately $2.3 million in the same 2020 period, an increase of $2.7 million, or 116.0%.

The balance of the increase in operating expenses was attributable to (i) professional fees, which increased approximately $241,000, or 99.2%, (ii) compensation, fees and taxes which increased approximately $672,000, or 91.7%, and (iii) general and administrative expenses which increased approximately $140,000, or 52.4%, offset in part by a reduction in impairment loss of $176,000, or 35.6%.

In November 2019 one of our co-chief executive officers and our director of marketing resigned, which reduced our compensation expense in the six months ended June 30, 2020.

Since July of 2020, we hired a chief operating officer, chief investment officer and junior executives in accounting and administration, which resulted in increased compensation for the six month periods ended June 30, 2021.

In the 2021 period, interest and amortization of deferred financing costs was approximately $7.5 million compared to approximately $3.6 million in the same 2020 period, an increase of approximately $4.0 million, or 111.6%.

The balance of the increase in operating expenses was attributable to (i) professional fees, which increased approximately $266,000, or 66.2%, (ii) compensation, fees and taxes which increased approximately $943,000, or 76.5%, (iii) general and administrative expenses which increased approximately $290,000, or 70.3% and (iv) an increase in the loss on sale of real estate of approximately $104,000.

In November 2019 one of our co-chief executive officers and our director of marketing resigned, which reduced our compensation expense in the nine months ended September 30, 2020.

Comprehensive income

For the six months ended June 30, 2021, we reported an unrealized loss on investment securities of approximately $112,000 reflecting the decrease in the market value of such securities since December 31, 2020.

For the six months ended June 30, 2020, we reported an unrealized gain on investment securities of approximately $86,000 reflecting the increase in the market value of such securities since December 31, 2019.

Net income for the six months ended June 30, 2021 was approximately $4.7 million, or $0.20 per share, compared to $4.5 million, or $0.20 per share for the six months ended June 30, 2020.

For the nine months ended September 30, 2021, we reported an unrealized loss on investment securities of approximately $612,000 reflecting the decrease in the market value of such securities since December 31, 2020.

For the nine months ended September 30, 2020, we reported an unrealized gain on investment securities of approximately $13,282 reflecting the increase in the market value of such securities since December 31, 2019.

Net income attributable to common shareholders for the nine months ended September 30, 2021 was approximately $8.1 million, or $0.32 per share, compared to $6.6 million, or $0.30 per share for the nine months ended September 30, 2020.

Liquidity and Capital Resources

At June 30, 2021, cash and cash equivalents and investment securities totaled approximately $106.7 million compared to $56.7 million at December 31, 2020.

This increase is attributable to $40.6 million of net proceeds from our Series A Preferred Stock offering as well as common stock issuances.

Total assets at June 30, 2021 were approximately $296.3 million compared to approximately $226.7 million at December 31, 2020, an increase of approximately $69.6 million, or 30.7%.

The increase was due primarily to increases in cash and cash equivalents and investment securities of $50.0 million, our mortgage loan portfolio of approximately $17.2 million, investment in partnership of approximately $1.8 million, and a net increase in property and equipment of $736,000, offset by a decrease in real estate owned of approximately $972,000.The increase in property and equipment is due to the purchase of an office building in Branford, Connecticut that will become our new corporate headquarters in 2022.

Total liabilities at June 30, 2021 were approximately $150.0 million compared to approximately $145.8 million at December 31, 2020, an increase of approximately $4.3 million, or approximately 2.9%.

This increase is principally due to increases in our line of credit of approximately $6.2 million, advances from borrowers of $1.2 million, and deferred revenue of approximately $131,000, offset by decreases in dividends payable of approximately $2.7 million, mortgage payable of $770,000, other loans of $258,000, and accounts payable and accrued expenses of $57,000.

Total shareholders’ equity at June 30, 2021 was approximately $146.3 million compared to approximately $80.9 million at December 31, 2020, an increase of approximately $65.4 million.

This increase was due primarily to our closing of the Series A Preferred Stock offering on June 29, 2021 with net proceeds of $40.6 million, net proceeds of $22.9 million from the sale of stock and our net income of approximately $4.7 million.

Net cash provided by operating activities for the six months ended June 30, 2021 was approximately $6.1 million compared to approximately $4.0 million for same 2020 period.

For the 2021 period net cash provided by operating activities consisted primarily of net income of $4.7 million, amortization of deferred financing costs and bond discount of $503,000, an impairment loss of $319,000, increase in deferred revenue of 131,000, and an increase in advances from borrowers of $1.2 million, offset by an increase in interest and fees receivable of $198,000, other receivables of $64,000, due from borrowers of $281,000, prepaid expenses of $82,000, and a gain on extinguishment of debt of $258,000.

For the 2020 period net cash from operations consisted primarily of net income of $4.5 million, an impairment loss of $495,000, depreciation and amortization of deferred financing cost of $267,000, and an increase in advances from borrowers of $164,000, offset by a realized gain on investments of approximately $437,000, increases in interest and fees receivable of $186,000, amounts due from borrowers of $598,000, and prepaid expenses of $48,000, and a decrease in deferred income of $347,000.

Net cash used for investing activities for the six months ended June 30, 2021 was approximately $26.7 million compared to approximately $15.7 million for the comparable 2020 period.

For the 2021 period, net cash used for investing activities consisted primarily of net principal disbursements for mortgages receivable of approximately $17.2 million, purchase of an interest in investment partnership of $1.8 million, net purchases of investment securities of $7.4 million, acquisitions of and improvements to real estate owned of $286,000, purchase of property and equipment of $776,000 and costs in connections with investment activities of $193,000, offset by proceeds from the sale of real estate owned of $919,000.

For the 2020 period, net cash used for investing activities consisted primarily of net principal disbursements for mortgages receivable of approximately $16.9 million, and the acquisition of and improvements to real estate owned of $1.0 million, offset by proceeds from the sale of real estate owned of $1.8 million and net proceeds from the sale of investment securities of approximately $512,000.

Net cash provided by financing activities for the six months ended June 30, 2021 was approximately $63.4 million compared to approximately $2.5 million of cash used for the comparable 2020 period.

Net cash provided by financing activities for the 2021 period consists principally of the net proceeds from issuance of common shares of $22.9 million, net proceeds from the issuance of preferred stock of $40.6 million and proceeds from our line of credit of 6.2 million, which increases were offset by dividends paid of $5.4 million, repayment of mortgage payable of $768,000 and the payment of financing costs of approximately $88,000.

Net cash used for financing activities for the 2020 period consists principally of dividends paid of approximately $2.7 million and financing costs incurred of approximately $58,000, offset by proceeds from other loans of $258,000.

On June 29, 2021, we sold 1,700,000 shares of Series A Preferred Stock for aggregate gross proceeds of $42.5 million and net proceeds, after deducting underwring discounts and commission and other offering expenses, of $40.6 million.

At September 30, 2021, cash and cash equivalents and investment securities totaled approximately $75.3 million compared to approximately $56.7 million at December 31, 2020.

This increase is attributable to approximately $45.5 million of net proceeds from our Series A Offering (defined below) as well as common stock issuances.

Total assets at September 30, 2021 were approximately $313.4 million compared to approximately $226.7 million at December 31, 2020, an increase of approximately $86.7 million, or 38.2%.

The increase was due primarily to an increase in cash and cash equivalents and investment securities of approximately $18.6 million, our mortgage loan portfolio of approximately $64.3 million, investment in partnership of approximately $1.8 million, a net increase in property and equipment of approximately $756,000, and increases in due from borrowers of approximately $1.4 million and interest and fees receivable of approximately $885,000, offset by a decrease in real estate owned of approximately $2.1 million.The increase in property and equipment is due to the purchase of an office building in Branford, Connecticut that we expect to become our new corporate headquarters in 2022.

Total liabilities at September 30, 2021 were approximately $154.6 million compared to approximately $145.8 million at December 31, 2020, an increase of approximately $8.8 million, or approximately 6.1%.

This increase is principally due to an increase in our line of credit of approximately $2.0 million, advances from borrowers of approximately $8.2 million (of which a majority represented prepaid interest), and deferred revenue of approximately $1.8 million, offset by decrease in dividends payable of approximately $2.7 million, mortgage payable of approximately $768,000, other loans of approximately $258,000, and accounts payable and accrued expenses of approximately $180,000.

Total shareholders’ equity at September 30, 2021 was approximately $158.8 million compared to approximately $80.9 million at December 31, 2020, an increase of approximately $77.8 million.

This increase was due primarily to our closing of the Series A Offering on June 29, 2021 and the partial exercise of the overallotment option to purchase an additional 203,000 shares of Series A Preferred Stock with aggregate net proceeds of approximately $45.5 million, net proceeds of approximately $30.9 million from the sale of stock and our net income to common shareholders of approximately $8.1 million.

Net cash provided by operating activities for the nine months ended September 30, 2021 was approximately $17.3 million compared to approximately $7.4 million for same 2020 period.

For the 2021 period net cash provided by operating activities consisted primarily of net income of approximately $9.0 million, amortization of deferred financing costs and bond discount of approximately $839,400, an impairment loss of approximately $469,000, increase in deferred revenue of approximately $1.8 million, and an increase in advances from borrowers of approximately $8.2 million, offset by a gain on sale of marketable securities of approximately $212,400 and a gain on forgiveness of debt of approximately $257,800, and an increase in interest and fees receivable of approximately $885,400, other receivables of approximately $361,000 and due from borrowers of approximately $1.4 million.

For the 2020 period net cash from operations consisted primarily of net income of approximately $6.6 million, an impairment loss of $495,000, depreciation and amortization of deferred financing cost of approximately $357,500, an increase in advances from borrowers of approximately $565,700, and accounts payable and accrued expenses of approximately $272,600, offset by a realized gain on investments of approximately $415,300, increases in interest and fees receivable of approximately $180,300, amounts due from borrowers of approximately $273,200, and prepaid expenses of approximately $82,100, and a decrease in deferred revenue of approximately $91,000.

Net cash used for investing activities for the nine months ended September 30, 2021 was approximately $85.0 million compared to approximately $41.4 million for the comparable 2020 period.

For the 2021 period, net cash used for investing activities consisted primarily of net principal disbursements for mortgages receivable of approximately $64.3 million, purchase of an interest in investment partnership of approximately $1.8 million, net purchases of investment securities of approximately $19.2 million, acquisitions of and improvements to real estate owned of approximately $333,400, purchase of property and equipment of approximately $817,800 and costs in connections with investment activities of approximately $281,000, offset by proceeds from the sale of real estate owned of approximately $1.8 million.

For the 2020 period, net cash used for investing activities consisted primarily of net principal disbursements for mortgages receivable of approximately $30.2 million, net purchases of investment securities of approximately $11.3 million and the purchase of property and equipment of approximately $118,000, and improvements to real estate owned of approximately $1.6 million, offset by proceeds from the sale of real estate owned of $1.8 million.

Net cash provided by financing activities for the nine months ended September 30, 2021 was approximately $67.5 million compared to approximately $20.5 million for the comparable 2020 period.

Net cash provided by financing activities for the 2021 period consists principally of the net proceeds from issuance of common shares of approximately $30.9 million, net proceeds from the issuance of preferred stock of approximately $45.5 million and proceeds from our line of credit of approximately $2.0 million, which increases were offset by dividends paid on common stock of approximately $8.8 million, dividends paid on preferred stock of approximately $932,000, repayment of mortgage payable of approximately $768,000 and financing costs incurred of approximately $451,000.

Net cash provided by financing activities for the 2020 period consists principally of the net proceeds from the issuance of fixed rate notes of approximately $14.4 million, proceeds from our line of credit of approximately $12.1 million and proceeds from other loans of approximately $258,000, which were offset by dividends paid of approximately $5.3 million and the payment of financing costs of approximately $852,000.

In June 2021 and July 2021, we raised aggregate net proceeds of approximately $45.5 million (after deducting underwriting discounts and commissions and offering expenses) from the sale of an aggregate of 1,903,000 shares of our Series A Preferred Stock in a firm commitment underwritten public offering at a public offering price of $25.00 per share, equal to the liquidation preference (the “Series A Offering”) as described in Notes 11 and 14 to the accompanying financial statements.

On July 21, 2021, we consummated a $200 million Facility with Churchill, a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New York, New York.

Under the terms of the Facility, we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans.

We intend to use the proceeds from the Facility to finance the continued expansion of our lending business and for general corporate purposes.

(See above and Note 6 to the attached financial statements.)

We project anticipated cash requirements for our operating needs as well as cash flows generated from operating activities available to meet these needs.

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Based on this analysis, we believe that our current cash balances and investment securities, and our anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months.

Our long-term cash needs will include principal payments on outstanding indebtedness and funding of new mortgage loans.

Our long-term cash needs will include principal payments on outstanding indebtedness, preferred dividends and funding of new mortgage loans.

Funding for long-term cash needs will come from unused net proceeds from financing activities, operating cash flows and proceeds from sales of real estate owned.

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Subsequent Events

On July 1, 2021, the underwriters of the Series A Preferred Stock offering partially exercised their overallotment option to purchase an additional 203,000 shares of Series A Preferred Stock, which was consummated on July 2, 2021.

The gross proceeds from the sale of of the overallotment shares were $5.1 million and the net proceeds were approximately $4.9 million.

The balance of the over-allotment option, 52,000 shares, was never exercised.

York, New York.

Under the terms of our Master Repurchase Agreement with Churchill, we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans.

We intend to use the proceeds from the Facility to finance the continued expansion of our lending business and for general corporate purposes.

From July 1, 2021 through August 9, 2021, we sold 1,582,717 of our common shares in an at-the-market offering (see Note 11) which raised $8,014,203 in net proceeds.

From October 1, 2021 through November 1, 2021, we sold 968,779 common shares in an at-the-market offering (see Note 11) which raised $5,411,273 in net proceeds.

On October 13, 2021, the board of directors declared a dividend of $0.12 per common share payable on October 29, 2021 to shareholders of record as of October 25, 2021.

Off-Balance Sheet Arrangements

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Contractual Obligations

As of June 30, 2021, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans as well as contractual obligations consisting of operating leases for equipment and software licenses.

As of September 30, 2021, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans as well as contractual obligations consisting of operating leases for equipment and software licenses.

Operating lease obligation

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis